Have you heard of the term “streamline refinance”? Lenders certainly have and when you discover what this process actually is, you may very well decide it’s time to refinance after all. A streamline refinance is where an existing mortgage is completely replaced by a new one. The term was originally coined when the Federal Housing Administration, or FHA, first introduced this low-documentation loan back in the 1980s. Let’s take a closer look.
Recall when you first bought your home and applied for a mortgage. The amount of documentation required was rather extensive as it relates to income, employment, assets, credit and the property being financed. Two years of W2 forms, most recent paycheck stubs covering a 30 day period, verification of employment from the employer, most recent bank statements, a credit report and credit scores and a full property appraisal. If the applicant was self-employed, then two years of income tax returns were needed in addition to a year-to-date profit and loss statement. Lenders can’t ignore these documentation guidelines if they want to have a loan eligible for sale in the secondary markets or be eligible for compensation should the loan go into default.
Streamline Refinance Explained
With a streamline refinance, the amount of documentation needed to process and approve a refinance essentially ignores most of that paperwork. Witha streamline there are no paycheck stubs needed, no W2 forms, no bank statements, no minimum credit score requirements and no property appraisal. Why the removal of such documentation when refinancing when that very same limited approval could have been performed the first time around?
Getting approved for a streamline refinance isn’t as easy as waving a magic wand but it’s still much easier compared to fully documenting a loan for a purchase. There are some guidelines that must be followed but the first step is to identify the “net tangible benefit.” The net tangible benefit lays out the guidelines for determining if a streamline refinance benefits the borrowers instead of just making another loan and selling the loan for a profit. What sort of benefit qualifies?
The most important is to lower the monthly payment. This is done by comparing the current rate with the proposed rate and reviewing the difference in monthly payments. Generally speaking, the effective payment must drop by about one-half of one percent. This is a common-sense approach to refinancing. If a homeowner is making the mortgage payments on time that same homeowner would still be able to make the monthly payments when lowered.
A streamline can also benefit the homeowner when switching from an adjustable-rate mortgage, or ARM, to a fixed-rate loan. With an ARM, the interest rate can and likely will adjust at some point in the future based upon the terms of the original note. This instability can be eliminated by the stability of a fixed-rate loan.
A streamline refinance can be approved when replacing one loan with the same type of loan. For instance, an FHA streamline can be used when replacing an existing FHA loan. The same goes for a VA loan or USDA loan.
Credit reports aren’t needed nor are there any minimum credit scores but lenders do want to take a look at your mortgage payment history. Streamline refinance guidelines ask there be no more than one payment made more than 30days past the due date over the last 12 months and no such late payments within the last six. The existing loan may also need a “seasoning” requirement. Seasoning means how long the loan has been in existence. FHA seasoning requirements ask the loan be at least 210 days old, for example. In addition, there may be other requirements beyond what the FHA needs. As it relates to value, there is no appraisal needed. Instead, the lender will use the original purchase price as the appraised value. This works even though the property may have lowered in value since the purchase.
There will be closing costs associated with a streamline refinance but because less documentation is needed the overall costs will be lower. You can get an estimate of the types of closing fees you can expect at closing with aCost Estimate I can provide. If you’ve been thinking about refinancing but aren’t sure if you’re ready to dive into the loan application process all over again but do want to lower your payment or get out of your ARM and into a fixed-rate loan, give me a call and let’s talk more to see if a streamline refinance loan is in your future.